Wall Street inflation euphoria

Investors welcomed data on a stronger-than-expected decline in CPI inflation in the US. For the S & P500 and Nasdaq it was the best session since April 2020.

Wall Street had been waiting for that signal since spring. According to the government’s Bureau of Labor Statistics, October saw a further decline in CPI inflation, which fell to 7.7%. This level is still very high, but at the same time the lowest since January and well below the high of the last 40 years in June. More importantly, however, the rise in the price index turned out to be far below economists’ expectations and sticky core inflation also slowed. We write more about this data in the article entitled “US inflation has dropped much more than expected.”

These figures fit perfectly with the narrative of the “inflation peak” which most likely was reached in June (and September at the core CPI). If it persists, it would increase the chance of the Federal Reserve collapsing with further interest rate hikes. And the lower the discount rate (ceteris paribus) the higher the valuation of the security.

This scenario was quickly priced in by the market. The market’s assessment of the possibility of a 75-point hike in the federal funds rate during the day dropped from more than 50% to less than 20%. On the other hand, the expected maximum level of interest rates in the Fed fell from over 5% to 4.75-5.00%.

This is what caused the euphoria on Wall Street. The S & P500 was up 5.54%, closing the session at 3,956.37 points. The Nasdaq rose as high as 7.35%, reaching a share of 11,114.15 points. The Dow Jones closed with an increase of 3.70% with the result of 33,715.37 points. Such dynamic increases on the New York stock exchanges have not been seen since the resumption of covid in April 2020.

– This is great news. We have been announcing the peak of inflation for a couple of months, which has been incredibly frustrating as it hasn’t been reflected in the data.. This is the first time that something like this appears in the data – enthusiastically said King Lip, chief strategist of Baker Avenue Asset Management, quoted by Reuters.

Skeptics remember, however, that the Wall Street boom rarely started at the peak of inflation. Typically, in the past, such a strong inflationary episode was followed by a recession and the crash of the stock market only ended at its lowest terms. And to put an end to it, federal funds rate cuts were needed, which is not expected (yet) by the end of 2023. disappointed investors several times.

– A relationship does not create a trend. What we have to hope for is another drop in CPI with the next report, which will be released the day before the next Fed meeting. Markets are ready to respond to anything positive, said Randy Frederick, CEO of Trading and Derivatives. By Charles Schwab.

Nonetheless, investors have launched into stocks of companies that could be the biggest beneficiaries of the US central bank’s change of stance. The Semiconductor Manufacturers Index (SOX) increased by more than 10%. The development sector sub-index also gained over 10%. Shares of large technology monopolies were also eagerly bought. Shares of Amazon were up 12.2%, Alphabet by 7.6%, Meta by 10.3% and Microsoft by 8.2%.

The debt market also reacted dynamically. The yield on 10-year US government bonds fell to the rarely seen rate of 32bps. Up to 3.88%. The 2-year bond yield fell nearly 30bps to 4.33%.

KK

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